UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________.
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
Suite 135 - 10551 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W9
(604) 270-9939
(Address and telephone number of registrant's principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ____
The number of outstanding shares of the registrant's
common stock, no par value, at June 30, 1998 was 6,502,189.
<PAGE>
- 2 -
MDSI MOBILE DATA SOLUTIONS INC.
INDEX TO THE FORM 10-Q
For the quarterly period ended June 30, 1998
Page
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets ...................................3
Consolidated Statements of Operations
and Retained Earnings (Deficit) ...............................4
Consolidated Statements of Cash Flows .........................5
Notes to the Consolidated Financial Statements ................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................8
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ...............................................18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............18
ITEM 5. OTHER INFORMATION...............................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................19
SIGNATURES ............................................................20
EXHIBIT INDEX ..........................................................21
<PAGE>
-3-
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
As at
----------------------------------------
June 30, December 31,
1998 1997
----------------- -----------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents......... $3,253,251 $ 110,117
Accounts receivable, net
Trade.......................... 14,361,826 15,256,202
Unbilled....................... 9,174,010 9,604,060
Work in progress.................. 2,512,525 1,451,662
Prepaid expenses.................. 1,327,930 1,647,748
Deferred income taxes............. 1,988,923 2,096,544
----------------- -----------------
32,618,465 30,166,333
CAPITAL ASSETS, NET................... 4,568,216 4,291,755
INTANGIBLE ASSETS, NET................ 5,753,698 6,185,926
----------------- -----------------
TOTAL ASSETS.......................... $42,940,379 $40,644,014
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................. $5,813,344 $3,936,501
Accrued liabilities .............. 4,806,932 8,353,417
Deferred revenue.................. 4,856,164 3,985,261
Current portion of long-term debt. 387,324 215,454
Current obligations under capital
leases. 448,639 20,621
----------------- -----------------
16,312,403 16,511,254
LONG-TERM DEBT ....................... - 296,324
OBLIGATIONS UNDER CAPITAL LEASES...... 939,138 -
----------------- -----------------
TOTAL LIABILITIES..................... 17,251,541 16,807,578
----------------- -----------------
STOCKHOLDERS' EQUITY
Common stock...................... 43,793,804 43,154,039
Treasury stock.................... (122,743) (122,743)
Retained earnings (deficit)....... (17,982,223) (19,194,860)
----------------- -----------------
25,688,838 23,836,436
----------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.................. $42,940,379 $40,644,014
================ ==================
See notes to consolidated financial statements
<PAGE>
-4-
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Operations and Retained Earnings (Deficit)
(Expressed in Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------------ ------------------------------------
1998 1997 1998 1997
------------------ --------------- ------------------ ----------------
REVENUE
<S> <C> <C> <C> <C>
Software and services.......................... $11,023,474 $11,157,235 $19,940,451 $18,274,749
Terminals and infrastructure................... 1,976,979 4,653,917 4,425,368 6,519,318
Third party products and services.............. 3,058,007 1,993,667 4,096,302 10,205,900
Maintenance and support........................ 1,884,578 659,408 3,561,281 1,496,625
----------------- ---------------- ------------------ ----------------
17,943,038 18,464,227 32,023,402 36,496,592
DIRECT COSTS....................................... 9,197,337 9,446,115 16,257,302 20,897,756
----------------- ---------------- ------------------ ----------------
GROSS PROFIT....................................... 8,745,701 9,018,112 15,766,100 15,598,836
----------------- ---------------- ------------------ ----------------
OPERATING EXPENSES
Research and development....................... 2,048,764 1,842,652 3,975,843 3,242,378
Sales and marketing ........................... 3,267,134 2,896,190 6,406,130 5,021,402
General and administrative..................... 1,572,668 1,645,524 3,081,104 2,804,393
Amortization of intangible assets.............. 216,114 216,197 432,228 360,961
Acquired research and development............... - 10,002,982 - 10,002,982
----------------- ---------------- ------------------ ----------------
7,104,680 16,603,545 13,895,305 21,432,116
----------------- ---------------- ------------------ ----------------
OPERATING INCOME (LOSS)............................ 1,641,021 (7,585,433) 1,870,795 (5,833,280)
OTHER INCOME ...................................... 81,213 18,977 53,727 133,552
----------------- ---------------- ------------------ ----------------
INCOME (LOSS) BEFORE TAX PROVISION................. 1,722,234 (7,566,456) 1,924,522 (5,699,728)
PROVISION FOR INCOME TAXES......................... (585,859) (825,221) (711,885) (1,428,669)
----------------- ---------------- ------------------ ----------------
NET INCOME (LOSS) FOR THE PERIOD .................. 1,136,375 (8,391,677) 1,212,637 (7,128,397)
RETAINED EARNINGS (DEFICIT), BEGINNING OF
PERIOD............................................. (19,118,598) (6,384,544) (19,194,860) (7,647,824)
----------------- ---------------- ------------------ ----------------
RETAINED EARNINGS (DEFICIT), END OF PERIOD......... $(17,982,223) $(14,776,221) $(17,982,223) $(14,776,221)
================= ================ ================== ================
Earnings (loss) per common share
Basic ........................................ $0.18 $(1.34) $0.19 $(1.17)
Diluted ...................................... $0.17 $(1.34) $0.18 $(1.17)
Weighted average shares outstanding
Basic......................................... 6,479,089 6,271,831 6,472,712 6,104,535
Diluted....................................... 6,635,811 6,271,831 6,628,682 6,104,535
</TABLE>
See notes to consolidated financial statements
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
(Unaudited)
Six months ended
June 30,
-------------------------------------
1998 1997
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period...... $1,212,637 $(7,128,397)
Items not affecting cash:
Depreciation and amortization....... 1,394,039 884,054
Deferred income taxes............... 107,621 665,530
Acquired research development....... - 10,002,982
Changes in non-cash operating
working capital items............ (215,358) (9,691,389)
------------------ ------------------
Net cash provided by (used in)
operating activities............... 2,498,939 (5,267,220)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares............. 639,765 901,707
Repayment of long-term debt........... (124,454) (573,545)
Repayment of loan notes............... - (428,424)
Net proceeds from (repayment of)
capital leases....................... 1,367,156 (21,963)
------------------ ------------------
Net cash provided by (used in)
financing activities.................. 1,882,467 (122,225)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Alliance............... - (1,892,426)
Acquisition of capital assets......... (1,238,272) (945,187)
------------------ ------------------
Net cash used in investing activities. (1,238,272) (2,837,613)
------------------ ------------------
NET CASH INFLOW (OUTFLOW)............... 3,143,134 (8,227,058)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD..................... 110,117 20,207,019
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD. $3,253,251 $11,979,961
================== ==================
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
During the six months ended June 30, 1998, the Company issued 21,698 common
shares on the exercise of 108,490 share purchase warrants and cash proceeds of
$307,100.
During the six months ended June 30, 1997, the Company issued 252,000 common
shares and 252,000 common share purchase warrants on the exercise of 252,000
special warrants without additional consideration. Also, during the six months
ended June 30, 1997, the Company acquired all of the issued and outstanding
shares of Alliance Systems, Incorporated ("Alliance") for $9,116,828.
Consideration consisted of 347,750 common shares of the Company and payments of
$2,188,750, including cash of $1,892,426 (US$1,367,869) and unsecured notes in
the principal amount of $296,324 (US$214,219).
See notes to consolidated financial statements
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the six months ended June 30, 1998
(Expressed in Canadian dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for
interim financial reporting and pursuant to the instructions of the
United States Securities and Exchange Commission Form 10-Q and Article
10 of Regulation S-X. While these financial statements reflect all
normal recurring adjustments which are, in the opinion of management,
necessary for fair presentation of the results of the interim period,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report filed on
Form 10-K for the year ended December 31, 1997.
(b) Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
(c) Recent pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, which standardizes the accounting for
derivative instruments. SFAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. The impact on the
Company's financial statements is not expected to be material.
<PAGE>
2. SEGMENTED INFORMATION
Segmented information
The Company develops, markets and supports mobile work force
management systems primarily to the utility, telecommunications/cable, land
transport (taxi, courier and roadside recovery) and general field service
market sectors. The Company considers its business to consist of one
reportable operating segment.
Geographic information
The Company earned revenue from sales to customers in the following
geographic locations:
<TABLE>
Three months ended Six months ended
June 30, June 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Canada ........................................ $ 307,200 $ 795,902 $ 459,345 $ 1,201,236
United States.................................. 12,873,666 7,977,608 22,141,915 21,757,112
Europe......................................... 4,245,566 9,384,763 8,160,800 12,933,171
Asia........................................... 261,681 305,954 1,006,417 605,073
South America.................................. 254,925 -- 254,925 --
---------------- ---------------- ----------------- ----------------
$ 17,943,038 $ 18,464,227 $ 32,023,402 $ 36,496,592
================ ================ ================= ================
</TABLE>
3. SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company issued 34,302 common shares
on the exercise of 171,510 share purchase warrants and cash proceeds of
$511,100.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements and information contained in this report constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievement of the Company, or developments in the Company's
industry, to differ materially from the anticipated results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to: the Company's limited operating
history, lengthy sales cycles, the Company's dependence upon large contracts and
relative concentration of customers, risks involving the management of growth
and integration of acquisitions, competition, product development risks and
risks of technological change, dependence on selected vertical markets and
third-party marketing relationships and suppliers, the Company's ability to
protect its intellectual property rights and the other risks and uncertainties
detailed in the Company's Securities and Exchange Commission filings, including
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
All financial information in this report is expressed in Canadian dollars
unless otherwise noted.
Overview
The Company develops, markets, implements and supports mobile workforce
management and wireless connectivity software and related network and mobile
computing equipment for use by a wide variety of companies that have substantial
mobile workforces, such as utility, telecommunications and cable companies, taxi
services, courier companies and public safety and roadside recovery
organizations. The Company's products are used by such companies in conjunction
with public and private wireless data communications networks to provide
comprehensive solutions for the automation of business processes associated with
the scheduling, dispatching and management of a mobile workforce. The Company's
products provide a cost-effective method for companies with mobile workers to
utilize data communications to communicate with such workers and for such
workers to interface on a real-time basis with their corporate information
systems.
The Company's revenue is derived from (i) software and services, consisting
of the licensing of software and provision of related services, including
project management, installation, integration, customization and training; (ii)
terminal and infrastructure equipment consisting of the sale of mobile computing
devices, related in-vehicle equipment and wireless data network equipment
manufactured by the Company; (iii) third party products and services, consisting
of the provision of non-MDSI products and services as part of the total
contract; and (iv) maintenance and support, consisting of the provision of
after-sale support services as well as hourly, annual or extended maintenance
contracts.
The implementation of a complete mobile data solution requires a wireless
data communications network, a land-based data communications network, mobile
computing devices integrated with wireless data communication modems, host
computer equipment, industry specific application software, wireless
connectivity software and a variety of services to manage and install these
components, integrate them with an organization's existing computer systems, and
configure or customize the software to meet customer requirements. Frequently,
in the Company's larger contracts only a limited number of the mobile computing
devices and in-vehicle equipment are installed initially, with the balance
implemented over a rollout period that may extend up to one year or more. Where
increases in mobile work forces require, or where additional departments of
mobile workers are added, additional mobile computing devices may be installed.
Revenue for software and services has historically accounted for a
substantial portion of the Company's revenue. Typically, the Company enters into
a fixed price contract with a customer for the licensing of selected software
products and the provision of specific services that are generally performed
within six to twelve months. Pricing for these contracts includes license fees
as well as a fee for professional services. The Company generally recognizes
total revenue for software and services associated with a contract using a
percentage of completion method based on the total costs incurred over the total
estimated costs to complete the contract.
From time to time, the Company is required to provide, through its UK
operations in the taxi, courier and roadside recovery markets, mobile computing
devices and wireless data communications network equipment.
<PAGE>
The Company is also called on to provide, in addition to MDSI products and
services, certain third party products, such as host computer hardware and
operating system software, mobile computing devices and radio data network
infrastructure equipment, or sub-contract services, such as radio data system
design and implementation. The Company recognizes revenue for the supply of
third party hardware upon transfer of beneficial ownership to the customer. The
Company recognizes revenue for the supply of third party services using a
percentage of completion method based on the costs incurred over the total
estimated cost to complete the third party services contract.
The Company believes that it will often supply some portion of third party
products and services to customers where it is successful in selling its own
products and services. There can be no assurance, however, that any contracts
entered into by the Company to supply third party software and products in the
future will represent a substantial portion of revenue in any future period.
Since the revenue generated from the supply of third party products and services
may represent a significant portion of certain contracts and the installation
and rollout of third party products is generally at the discretion of the
customer, the Company may, depending on the level of third party products and
services provided during a period, experience large quarterly fluctuations in
revenue.
The Company's customers typically enter into ongoing maintenance agreements
that provide for maintenance, product enhancement and technical support services
for a period commencing after expiration of the initial warranty period.
Maintenance agreements typically have a term of twelve months and are invoiced
either annually or monthly. Revenue for these services is recognized ratably
over the term of the contract.
The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. As a result, any substantial delay in the
Company's completion of a contract or the introduction of new products, the
inability of the Company to obtain new contracts or the cancellation of an
existing contract by a customer could have a material adverse effect on the
Company's results of operations, cash flows and financial condition. Delays in
the implementation of contracts may result in delays in the implementation or
cancellation of subsequent contracts. The Company's contracts are generally
cancelable upon notice by the customer. The loss of certain contracts could have
a material adverse effect on the Company's business, operating results, cash
flows and financial condition. As a result of these and other factors, the
Company's results of operations have fluctuated in the past and may continue to
fluctuate from period-to-period.
<PAGE>
Effects of Acquisition
These consolidated financial statements of the Company reflect the
acquisition of Alliance Systems, Incorporated ("Alliance") effective April 17,
1997. This acquisition has been accounted for using the purchase method.
On April 17, 1997, the Company entered into an agreement to acquire
Alliance which was completed July 1, 1997. Alliance is a supplier of mobile
workforce management solutions to the utility, public safety and cable markets.
The acquisition resulted in the write-off of $10.0 million associated with
acquired research and development. The Company's results of operations for the
six months ended June 30, 1997 include only the results of operations of
Alliance from April 17, 1997.
The Company has a limited history of operations on a combined basis with
Alliance. As a result, the financial information presented in this report is not
indicative of the results that would have been obtained had the acquisition
occurred prior to the commencement of the periods covered herein, and such
information should not be relied upon as an indication of future performance.
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain
components of the selected financial data of the Company as a percentage of
total revenue:
<TABLE>
Three months ended Six months ended
June 30, June 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
---------------- ---------------- ----------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE
<S> <C> <C> <C> <C>
Software and services..................... 61.5% 60.4% 62.3% 50.1%
Termina1s and infrastructure.............. 11.0 25.2 13.8 17.9
Third party products and services......... 17.0 10.8 12.8 28.0
Maintenance and support................... 10.5 3.6 11.1 4.0
---------------- ---------------- ----------------- ----------------
100.0 100.0 100.0 100.0
DIRECT COSTS................................... 51.3 51.2 50.8 57.3
---------------- ---------------- ----------------- ----------------
GROSS PROFIT................................... 48.7 48.8 49.2 42.7
---------------- ---------------- ----------------- ----------------
OPERATING EXPENSES
Research and development.................. 11.4 10.0 12.4 8.9
Sales and marketing....................... 18.2 15.7 20.0 13.8
General and administrative................ 8.8 8.9 9.6 7.7
Amortization of intangible assets......... 1.2 1.2 1.3 1.0
Acquired research and development......... -- 54.1 -- 27.4
---------------- ---------------- ----------------- ----------------
39.6 89.9 43.3 58.8
---------------- ---------------- ----------------- ----------------
OPERATING INCOME (LOSS)........................ 9.1 (41.1) 5.9 (16.1)
OTHER INCOME .................................. 0.5 0.1 0.1 0.4
---------------- ---------------- ----------------- ----------------
INCOME (LOSS) BEFORE TAX PROVISION............. 9.6 (41.0) 6.0 (15.7)
PROVISION FOR INCOME TAXES....................... (3.3) (4.5) (2.2) (3.9)
---------------- ---------------- ----------------- ----------------
NET INCOME (LOSS) FOR THE PERIOD............... 6.3% (45.4)% 3.8% (19.6)%
================ ================ ================= ================
==========================================================================================================================
</TABLE>
<PAGE>
Three Months Ended June 30, 1998 Compared to the Three Months Ended June 30,
1997
Revenue - Revenue decreased by $521,000 (2.8%) for the three months ended
June 30, 1998 as compared to the three months ended June 30, 1997.
Software and services revenue decreased by $134,000 (1.2%) for the three
months ended June 30, 1998 as compared to the three months ended June 30, 1997.
Terminals and infrastructure revenue decreased by $2.7 million (57.5%) for
the three months ended June 30, 1998 as compared to the three months ended June
30, 1997. This decrease is due primarily to changes in estimates to complete
certain pre-existing contracts in the MDSI UK operations and the resulting
delays in delivery of terminals. Terminals and infrastructure revenue is derived
from the MDSI UK operations.
Third party products and services revenue increased by $1.1 million (53.4%)
for the three months ended June 30, 1998 as compared to the three months ended
June 30, 1997. Third party products and services revenue primarily represents
revenue earned from certain customers pursuant to agreements under which the
Company provides third party products and services, typically host computer
equipment and mobile computing devices, as part of the installation of software
and provision of services. Revenue from deliveries of third party products and
services will fluctuate from period to period given the timing of certain
contracts and the rollout schedules which are established primarily by the
customers. Accordingly, this will result in large fluctuations in revenue,
direct costs, gross profits and income from operations from one period to
another.
Maintenance and support revenue was $1.9 million for the three months ended
June 30, 1998 as compared to $659,000 for the three months ended June 30, 1997.
Maintenance and support revenue is expected to increase as such revenue
generally corresponds to the level of the Company's installed customer base.
Direct Costs - Direct costs were 51.3% of revenue for the three months
ended June 30, 1998 as compared to 51.2% for the three months ended June 30,
1997. Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, production and
inventory costs associated with terminals and infrastructure equipment provided
by MDSI UK and costs related to host equipment and mobile devices on behalf of
third party product sales. Labor costs included direct payroll, benefits and
overhead charges.
Gross Margins. Gross margins were 48.7% of revenue for the three months
ended June 30, 1998 as compared to 48.8% for the three months ended June 30,
1997. The comparative gross margins reflect the similar mix in revenue during
the second quarter of 1998 and compared to the same quarter in 1997.
Research and Development. Research and development expenses were 11.4% of
revenue for the three months ended June 30, 1998 and 10.0% of revenue for the
three months ended June 30, 1997. Total research and development expenditures
for the three months ended June 30, 1998 of $2.0 million represents an increase
of $206,000 (11.2%) as compared to the same period in 1997. The increase in
research and development expenses in 1998 is a result of the continued
development and enhancement of the Company's Advantex products. The Company
anticipates continuing to commit a significant portion of its product revenues
to enhancement of existing products and the development of new products,
resulting in an anticipated increase in the dollar amounts of research and
development expenses.
Sales and Marketing. Sales and marketing expenses were 18.2% of revenue for
the three months ended June 30, 1998 and 15.7% of revenue for the three months
ended June 30, 1997. This represents an increase of $371,000 (12.8%) as compared
to the same period in 1997. The increase was primarily due to an increase in
marketing, sales and technical support personnel to support the Company's
increased marketing activities worldwide. The Company anticipates that the
dollar amounts of its sales and marketing expenses will continue to increase as
the result of the Company's commitment to its international marketing effort.
General and Administrative. General and administrative expenses were 8.8%
of revenue for the three months ended June 30, 1998 and 8.9% of revenue for the
three months ended June 30, 1997. Total general and administrative expenses of
<PAGE>
$1.6 million represents a decrease of $73,000 (4.4%) for the three months ended
June 30, 1998 as compared to the same period in 1997. The Company expects that
its general and administrative expenses will increase in the future as the
Company expands its staffing, information systems and other administrative costs
to support its expanding operations.
Other Income. Other income was $81,000 for the three months ended June 30,
1998 as compared to $19,000 for the three months ended June 30, 1997.
Substantially all of other income relates to interest income on cash and short
term deposits and fluctuations in the currencies of the Company's foreign
operations.
Income Taxes. The Company provided for income taxes on earnings for the
three months ended June 30, 1998 at the rate of 30.2%, after adjusting for the
amortization of intangible assets. The Company's effective tax rate reflects the
blended effect of Canadian, US, UK and other foreign jurisdictions' tax rates.
<PAGE>
Six months ended June 30, 1998 Compared to the Six months ended June 30, 1997
Revenue - Revenue decreased by $4.5 million (12.3%) for the six months
ended June 30, 1998 as compared to the six months ended June 30, 1997. This
decrease in revenue is due primarily to a reduction in deliveries of third party
products and services and terminals and infrastructure during the six months
ended June 30, 1998 relative to the same period in 1997.
Software and services revenue increased by $1.7 million (9.1%) for the six
months ended June 30, 1998 as compared to the six months ended June 30, 1997.
Terminals and infrastructure revenue decreased by $2.1 million (32.1%) for
the six months ended June 30, 1998 as compared to the six months ended June 30,
1997. This decrease is due primarily to changes in estimates to complete certain
pre-existing contracts in the MDSI UK operations and the resulting delays in
delivery of terminals. Terminals and infrastructure revenue is derived from the
MDSI UK operations.
Third party products and services revenue decreased by $6.1 million (59.9%)
for the six months ended June 30, 1998 compared to the six months ended June 30,
1997. Third party products and services revenue primarily represents revenue
earned from certain customers pursuant to agreements under which the Company
provides third party products and services, typically host computer equipment
and mobile computing devices, as part of the installation of software and
provision of services. Revenue from deliveries of third party products and
services will fluctuate from period to period given the timing of certain
contracts and the rollout schedules which are established primarily by the
customers. Accordingly, this will result in large fluctuations in revenue,
direct costs, gross profits and income from operations from one period to
another.
Maintenance and support revenue was $3.6 million for the six months ended
June 30, 1998 as compared to $1.5 million for the six months ended June 30,
1997. Maintenance and support revenue is expected to increase as such revenue
generally corresponds to the level of the Company's installed customer base.
Direct Costs - Direct costs were 50.8% of revenue for the six months ended
June 30, 1998 as compared to 57.3% for the six months ended June 30, 1997. The
decrease in direct costs as a percentage of revenue relates primarily to the
decrease in revenue relating to deliveries of third party products and services
and terminals and infrastructure which typically have a higher direct cost
component that software and services. Direct costs include labor and other costs
directly related to a project including those related to the provision of
services and support, production and inventory costs associated with terminals
and infrastructure equipment provided by MDSI UK and costs related to host
equipment and mobile devices on behalf of third party product sales. Labor costs
included direct payroll, benefits and overhead charges.
Gross Margins. Gross margins were 49.2% of revenue for the six months ended
June 30, 1998 as compared to 42.7% for the six months ended June 30, 1997. The
increase in gross margin as a percentage of revenue relates to the change in the
mix of revenues during the six months ended June 30, 1998 relative to the same
period in 1997. During the six months ended June 30, 1998, there was an increase
in software and services revenue, which typically has a higher gross margin, and
a decrease in third party products and services and terminals and
infrastructure, which typically has a lower gross margin, relative to the same
period in 1997.
Research and Development. Research and development expenses were 12.4% of
revenue for the six months ended June 30, 1998 and 8.9% of revenue for the six
months ended June 30, 1997. Total research and development expenditures for the
six months ended June 30, 1998 of $4.0 million represents an increase of
$733,000 (22.6%) as compared to the same period in 1997. The increase in
research and development expenses in 1998 is a result of the continued
development and enhancement of the Company's Advantex products. The Company
anticipates continuing to commit a significant portion of its product revenues
to enhancement of existing products and the development of new products,
resulting in an anticipated increase in the dollar amounts of research and
development expenses.
Sales and Marketing. Sales and marketing expenses were 20.0% of revenue for
the six months ended June 30, 1998 and 13.8% of revenue for the six months ended
June 30, 1997. This represents an increase of $1.4 million (27.6%) as compared
<PAGE>
to the same period in 1997. The increase was primarily due to an increase in
marketing, sales and technical support personnel to support the Company's
increased marketing activities worldwide. The Company anticipates that the
dollar amounts of its sales and marketing expenses will continue to increase as
the result of the Company's commitment to its international marketing effort.
General and Administrative. General and administrative expenses were 9.6%
of revenue for the six months ended June 30, 1998 and 7.7% of revenue for the
six months ended June 30, 1997. Total general and administrative expenses of
$3.1 million represents an increase of $277,000 (9.9%) for the six months ended
June 30, 1998, as compared to the same period in 1997. The Company expects that
its general and administrative expenses will increase in the future as the
Company expands its staffing, information systems and other administrative costs
to support its expanding operations.
Other Income. Other income was $54,000 for the six months ended June 30,
1998 as compared to $134,000 for the six months ended June 30, 1997.
Substantially all of other income relates to interest income on cash and short
term deposits and fluctuations in the currencies of the Company's foreign
operations
Income Taxes. The Company provided for income taxes on earnings for the six
months ended June 30, 1998 at the rate of 30.2%, after adjusting for the
amortization of intangible assets. The Company's effective tax rate reflects the
blended effect of Canadian, US, UK and other foreign jurisdictions' tax rates.
<PAGE>
Liquidity and Capital Resources
The Company finances its operations, acquisitions and capital expenditures
with cash generated from operations, loans, capital leases, private placements
and public offerings of its securities. At June 30, 1998, the Company had cash
and cash equivalents of $3.3 million and working capital of $16.3 million.
Cash provided by operating activities was $2.5 million for the six months
ended June 30, 1998 compared to an outflow of $(5.3) million for the same period
in 1997. The net inflow of cash from operating activities during the six months
ended June 30, 1998 is generated from net income of $1.2 million after adjusting
for depreciation and amortization expenses.
Cash provided by financing activities of $1.9 million during the six months
ended June 30, 1998 relates to proceeds from common shares issued for $640,000
pursuant to the exercise of stock options and share purchase warrants, net of
the repayment of certain long-term debt for $124,000 and the proceeds from
capital lease financing of equipment for $1.4 million. The capital leases are to
be repaid evenly over periods expiring between June, 2001 and September, 2001
and are secured by certain capital assets of the Company.
Cash used in investing activities was $1.2 million for the six months ended
June 30, 1998 as compared to $2.8 million for the same period in 1997. Total
investing activity during the six months ended June 30, 1998 consisted of
purchases of capital assets, including computer hardware and software for use in
research and development activities and to support the growth of the Company's
corporate information systems. Cash used in investing activities during the six
months ended June 30, 1997 included cash payments of $1.9 million on behalf of
the Alliance acquisition.
Existing sources of liquidity at June 30, 1998 include $3.3 million of cash
and cash equivalents and up to $5.0 million available under the Company's
operating line of credit. At June 30, 1998, (sterling pounds)200,000 of such
amount was committed to securing the Company's obligations under outstanding
letters of credit. Under the terms of the agreement, borrowings and letters of
credit under the line are limited to 60% to 90% of eligible accounts receivable.
Borrowings accrue interest at the bank's prime rate plus 0.5%. At June 30, 1998,
the Company had no borrowings under the line of credit.
The Company believes that future cash flows, in addition to funds on hand
and its borrowing capacity under the line of credit, will provide sufficient
funds to meet cash requirements for at least the next twelve months.
Commensurate with its past and expected future growth, the Company may increase,
from time to time, its borrowing facility under its operating line of credit to
support its operations. The Company may use cash to fund other acquisitions of
businesses or products complementary to the Company's business although the
Company has no plans to do so. The Company has no material additional
commitments other than operating and capital leases. Future growth or other
investing activities may require the Company to obtain additional equity or debt
financing, which may or may not be available on attractive terms, or at all, or
may be dilutive to current or future shareholders.
<PAGE>
Year 2000
The Company is currently in the process of addressing the Year 2000 issue.
This includes a comprehensive project to upgrade its information systems and
development software that will consistently and properly recognize the Year
2000. Certain of the Company's systems include new hardware and packaged
software purchased from vendors who have represented that the systems are Year
2000 compliant. The Company is in the process of obtaining assurances from
vendors that timely updates will be made available to make all remaining
purchased software Year 2000 compliant.
The Company believes that it has identified all significant information
systems and software development applications that will require modification to
ensure Year 2000 compliance. Internal and external resources are being used to
make the required modifications and test Year 2000 compliance. The Company
intends to complete the testing process of all significant applications by
December 31, 1998.
The Company is also in the process of initiating formal communications with
all of its significant suppliers and customers to determine the extent to which
the Company may be at risk as a result of the failure of third parties to
remediate their own Year 2000 issues. The Company can give no guarantee that the
systems of other companies on which the Company's systems rely will be converted
on time or that a failure to convert by another company or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
The total cost to the Company of these Year 2000 compliance activities has
not been and is not anticipated to be material to its financial position,
results of operations or cash flows in any given year. The estimate of costs and
the date on which the Company plans to complete the Year 2000 modification and
testing processes are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
<PAGE>
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against
the Company. From time to time, the Company is a party to litigation and
claims incident to the ordinary course of business. While the results of
litigation and claims cannot be predicted with certainty, the Company
believes that the final outcome of such matters will not have a material
adverse effect on the Company's business, financial condition and results
of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual General Meeting of Shareholders was held on
May 7, 1998. A total of 3,021,964 shares of the Company's common stock were
represented in person or by proxy at the Meeting, consisting of 46.66% of
the total number of shares of the Company's common stock outstanding on
March 27, 1998, the record date for the Meeting.
At the Meeting, all of the current Directors of the Company, were
re-elected to serve as Directors until the 1999 Annual General Meeting or
until their earlier retirement, resignation, or removal. The following
table sets forth the voting in the election for Directors:
<TABLE>
Votes Cast For Votes Cast Votes
Nominee Nominee Against Withheld Abstentions Not Voted
------- ------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Erik Dysthe 2,828,902 0 100 3,700 189,262
Kenneth R. Miller 2,828,614 0 388 3,700 189,262
John T. McLennan 2,829,002 0 0 3,700 189,262
Terrence P. McGarty 2,825,002 0 4,000 3,700 189,262
Robert C. Harris, Jr. 2,827,502 0 1,500 3,700 189,262
Gerald F. Chew 2,824,002 0 5,000 3,700 189,262
Bruno Ducharme 2,825,002 0 4,000 3,700 189,262
Marc Rochefort 2,825,002 0 4,000 3,700 189,262
</TABLE>
The shareholders approved the proposed 1998 Stock Option Plan. The
following table sets forth the information regarding the voting on the
proposal:
Votes Cast Votes Cast Votes
For Against Withheld Abstentions Not Voted
--- ------- -------- ----------- ---------
1,708,450 317,750 0 4,150 991,614
<PAGE>
The shareholders approved the proposed 1998 Stock Purchase Plan. The
following table sets forth the information regarding the voting on the
proposal:
Votes Cast Votes Cast Votes
For Against Withheld Abstentions Not Voted
--- ------- -------- ----------- ---------
2,009,374 18,376 0 2,600 991,614
The shareholders approved the Company's consolidated financial
statements and notes thereto together with the Auditors' Report for the
year ended December 31, 1997. The following table sets forth the
information regarding the voting on the proposal:
Votes Cast Votes Cast Votes
For Against Withheld Abstentions Not Voted
--- ------- -------- ----------- ---------
2,829,452 1,500 0 1,750 189,262
The shareholders ratified the appointment of Deloitte & Touche as the
Company's Auditors for the fiscal year ending December 31, 1998 and
authorization for the directors to fix the remuneration. The following
table sets forth the information regarding the voting on the proposal:
Votes Cast Votes Cast Votes
For Against Withheld Abstentions Not Voted
--- ------- -------- ----------- ---------
2,736,382 39,898 0 56,422 189,262
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 11.1 Computation of Earnings (Loss) per Common Share.
b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MDSI MOBILE DATA SOLUTIONS INC.
Date: August 13, 1998 By:/s/ ERIK DYSTHE
--------------------------------------------
Name: Erik Dysthe
Title: Chairman and Chief Executive Officer
Date: August 13, 1998 By:/s/ VERNE D. PECHO
--------------------------------------------
Name: Verne D. Pecho
Title: Vice President Finance &
Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE>
MDSI MOBILE DATA SOLUTIONS INC.
EXHIBIT INDEX
For the quarterly period ended June 30, 1998
Exhibit 11.1
Computation of Earnings (Loss) per Common Share..............................22
<PAGE>
<TABLE>
EXHIBIT 11.1
MDSI MOBILE DATA SOLUTIONS INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(Expressed in Canadian dollars)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net earnings (loss) for the period ............ $ 1,136,375 $ (8,391,677) $ 1,212,637 $ (7,128,397)
================ ================ ================= ================
Weighted average shares outstanding ........... 6,479,089 6,271,831 6,472,712 6,104,535
Common stock equivalents
Stock options............................ 148,282 -- 145,662 --
Share purchase warrants ................. 8,440 -- 10,308 --
---------------- ---------------- ----------------- ----------------
Total shares for diluted earnings (loss) per
common share................................... 6,635,811 6,271,831 6,628,682 6,104,535
================ ================ ================= ================
Basic earnings (loss) per common share......... $ 0.18 $ (1.34) $ 0.19 $ (1.17)
Diluted earnings (loss) per common share ...... $ 0.17 $ (1.34) $ 0.18 $ (1.17)
==========================================================================================================================
</TABLE>
